Trusts Flashcards
1
Q
Describe a trust and its parties.
A
A fiduciary relationship in which one person (trustee) holds legal title to certain property (the trust res) for the benefit of another person (beneficiary)
Beneficiary (one or more) holds Equitable Title.
Trustee (one or more) holds Legal Title and owes fiduciary duties.
Settlor declares what property is to be held in trust.
2
Q
What are the elements of a trust?
A
1) INTENT to create a trust by a settlor with the CAPACITY to do so;
2) Trust PROPERTY;
3) Trust BENEFICIARIES who are ASCERTAINABLE;
4) A WRITTEN instrument in most, but not all, cases; AND
5) A DELIVERY of PROPERTY to someone, except in the case of a declaration trust.
3
Q
What if a trustee is not named by the settlor?
A
The trust does NOT fail.
THE COURT WILL APPOINT ONE.
4
Q
What methods of creating a trust are recognized in Texas under the Texas Trust Code?
A
1) The property owner’s DECLARATION that the owner holds the property as trustee for another person. No transfer of property to a third person occurs here. It is GOOD PRACTICE TO CHANGE LEGAL TITLE to those assets to reflect that the settlor now holds the property as trustee. THIS IS A TRUST MADE DURING THE SETTLOR’S LIFETIME.
2) A property owner’s INTER VIVOS TRANSFER of the property to another person as trustee for the transferor or a third person.
3) A property owner’s TESTAMENTARY transfer to another person as trustee for a third person. ESTABLISHED BY THE SETTLOR’S WILL. These trusts are subject to the law of wills. Cannot become effective UNTIL THE DEATH OF THE SETTLOR.
4) An appointment under a POWER OF APPOINTMENT to another person as trustee for the donee of the power or for a third person.
5) A PROMISE to another person whose rights under the promise are to be held in trust for a third person.
5
Q
What is a resulting trust?
A
NOT A TRUST SUBJECT TO THE TRUST CODE.
TWO SITUATIONS:
1) Failure of Express Trust - If the settlor attempts by fails to create an express trust OR if an express trust is created but later fails. Person in possession of the intended trust property holds it for, and must re-transfer it to, the grantor, his estate, his devisees, or his heirs.
2) Purchase Money Resulting Trust - If buyer purchases property but has it titled in the name of another, that other person is presumed to hold it in a purchase money resulting trust. EXCEPTION applies if the grantee is a natural object of the buyer’s bounty (these situations lead to the purchase being a GIFT).
The presumption of a PMRT is REBUTTABLE - can be rebutted by evidence showing Buyer’s true intent. Must be shown by CLEAR AND CONVINCING EVIDENCE.
6
Q
What is a Constructive Trust?
A
NOT A TRUST SUBJECT TO THE TRUST CODE.
This is an EQUITABLE REMEDY that precludes someone who receives legal title to an asset from keeping it. Used to AVOID UNJUST ENRICHMENT.
Law requires the “constructive trustee” to relinquish the property to another.
7
Q
What are two other types of “trusts” that don’t fall under the trust code.
A
Business Trust
Deed of Trust
8
Q
Explain the revocability of trusts. What is the Texas presumption?
A
REVOCABLE TRUST - A trust over which the settlor has the power to revest outright title to trust property in himself by terminating the trust.
IRREVOCABLE TRUST - Not subject to this power by the settlor.
TEXAS TRUSTS ARE PRESUMED REVOCABLE . . .
UNLESS expressly made irrevocable by trust terms.
9
Q
How must revocation of a trust be done?
A
If the trust is created by a written instrument, revocation MUST BE IN WRITING. The instrument must MANIFEST INTENT TO REVOKE but need not use the word “revocation.”
10
Q
What do the terms of the trust generally determine?
A
1) Duties and powers of the trustee;
2) Relations among trustees; and
3) Rights and interests of a beneficiary.
11
Q
T/F - Most rules in the Texas Trust Code are default rules and can be modified.
A
True
12
Q
Are any rules in the Texas Trust Code mandatory?
A
Yes, the terms of a trust MAY NOT LIMIT:
1) Requirement that a trust not have an ILLEGAL PURPOSE, or require a trustee to commit a criminal or tortious act.
2) Provisions that restrict the ability of a settlor to exculpate a trustee from liability for certain egregious breaches of trust.
3) Periods of limitation for bringing a judicial proceeding regarding the trust.
4) A trustee’s duty (in an irrevocable trust) to respond to a demand for accounting by a beneficiary who is entitled or permitted to receive distributions or would receive a distribution if the trust terminated at the time of the demand.
5) A trustee’s duty to act in GOOD FAITH and IN ACCORDANCE WITH PURPOSES OF THE TRUST.
6) The power of a court to take action or exercise jurisdiction with respect to a trust matter.
7) The applicability of TTC 112.038 which renders unenforceable a trust forfeiture clause (analogous to a no-contest clause in a will) where a beneficiary brings an action in good faith AND just cause existed for the action.
8) Common law duty of a trustee to keep a beneficiary of an irrevocable trust who is at least 25 YEARS OF AGE or older informed at any time during which the beneficiary is entitled or permitted to receive distributions or would receive distributions upon the trust’s termination.
13
Q
When is writing required in a trust?
A
1) DECLARATION OF TRUST - Trust of PERSONAL PROPERTY requires a declaration IN WRITING by the settlor that she holds the property as trustee for another person or for herself and another person as a beneficiary. WRITING NEED NOT BE SIGNED BY THE SETTLOR.
IF REAL PROPERTY, must be WRITTEN evidence of the trust’s terms bearing the SIGNATURE of the settlor or the settlor’s authorized agent.
2) TRANSFER OF TRUST TO ANOTHER - Transfer of personal property to a trustee who is neither settlor nor beneficiary is effective to create a trust IF: settlor expresses SIMULTANEOUSLY WITH OR PRIOR TO the transfer the intention to create a trust. WRITING IS NOT REQUIRED.
IF REAL PROPERTY, WRITTEN EVIDENCE of the trust’s terms bearing the SIGNATURE OF THE SETTLOR or the settlor’s authorized agent IS REQUIRED.
14
Q
What must be true about the purpose of a trust?
A
Can be created for any purpose that is NOT ILLEGAL.
15
Q
What “intent” is required for a trust?
A
Settlor must MANIFEST intent to create a trust. No magic words, like “trust” or “trustee,” are necessary.
Has to be clear.
Words like “I wish that,” “My desire is that,” or “I ask that” a named transferee hold property in a certain manner does NOT necessarily create a trust. This is PRECATORY LANGUAGE (not binding).
16
Q
What capacity must a settlor have?
A
CREATING A TRUST BY WILL - Must have TESTAMENTARY CAPACITY.
CREATING AN INTER VIVOS TRUST - Must have the capacity required to MAKE A GIFT.
17
Q
What is required of beneficiaries to have a valid trust?
A
Requires the existence of ASCERTAINABLE beneficiaries. DO NOT NEED A NAME OR EVEN HAVE TO BE BORN (guardian will carry out an unborn beneficiary’s rights). Class designation is sufficient if the members of the class can be PRECISELY DETERMINED.
Beneficiaries have the RIGHT TO ENFORCE the trust and SUE THE TRUSTEE for breach of fiduciary duties.
18
Q
What interest does a beneficiary have?
A
EQUITABLE INTEREST IN:
1) Trust Income; AND/OR
2) Trust Principle
19
Q
Who can beneficiaries be?
A
Generally, they must be humans. However, Texas allows for ANIMAL TRUSTS.
20
Q
What are the requirements for an Animal Trust?
A
1) Animals must be ALIVE during the settlor’s life time, AND
2) Trust must terminate on the death of the animals,
The terms of the trust may appoint a human to enforce the trust.
RAP APPLIES
21
Q
What qualifies as trust property?
A
Basically any property from any source. Does NOT need to be very much. The trust property is called the “res.”
AN UNENFORCEABLE PROMISE TO MAKE A GIFT IN THE FUTURE IS NOT PROPERTY.
22
Q
Explain the trustee of a trust.
A
Holder of LEGAL title to the trust property. Charged with FIDUCIARY DUTIES in the management and distribution of the trust property. CAN HAVE MORE THAN ONE TRUSTEE.
A beneficiary CAN be a trustee, as long as the beneficiary is NOT the sole trustee and the sole beneficiary.
Settlor CAN be a trustee, or even the sole trustee, as long as the settlor is NOT the sole beneficiary of the trust too.
Trustee CAN BE A CORPORATION.
23
Q
What if the beneficiary of the trust is the sole beneficiary and the sole trustee?
A
Equitable and Legal Title MERGE and the TRUST TERMINATES.
24
Q
Does a trustee have to accept being a trustee?
A
YES, the trustee must accept the office of trustee in order to assume liabilities and duties.
A SIGNATURE OF THE TRUSTEE ON THE WRITING OR ON A SEPARATE WRITTEN ACCEPTANCE IS CONCLUSIVE EVIDENCE THAT THE PERSON ACCEPTED THE TRUSTEE POSITION.
25
T/F - A person named as trustee who does not accept the trust may still incur liability with respect to the trust.
No, did not accept.
26
Can a trustee's acceptance be presumed?
A person named as trustee who exercises power or performs duties under the trust is PRESUMED to have accepted the trust.
The following conduct will NOT presume acceptance:
1) Preserving trust property if, within a reasonable time after acting, the person gives notice of the rejection of the trust to the settlor; OR
2) Inspecting or investigating trust property for any purpose.
27
What if the trustee rejects the trust or is dead?
Then the person named as an alternate trustee in the trust terms may accept the trust.
If no alternates, then the COURT WILL APPOINT A TRUSTEE.
28
Explain the delivery requirement in creating a trust.
Trust property must be delivered to the other person (trustee). Delivery can be actual, constructive or symbolic.
ACTUAL - The property is physically transferred to another person.
CONSTRUCTIVE - The access to the property to be held in trust (key to a safe) is transferred to another person.
SYMBOLIC - A writing (trust instrument) is transferred to another person.
NOTE: FOR TITLED PROPERTY, A CERTIFICATE OF OWNERSHIP (e.g., stock certificate) GENERALLY MUST BE PLACED IN THE CONTROL OR NAME OF THE INTENDED TRUSTEE.
29
What if trust property is delivered to the trustee and the trustee rejects office?
The legal title would revert BACK TO THE SETTLOR.
30
How is property delivered to the trustee in the case of a testamentary trust?
TWO METHODS:
1) TRADITIONAL - The terms are part of the settlor's will.
2) "POUR-OVER WILL" - Transfers estate assets to a trustee of a trust governed by terms that are NOT in the will.
IN TEXAS, a pour-over gift by will to a trustee of a trust that is executed BEFORE, WITH, OR AFTER the execution of the settlor/testator's will.
31
How are trusts classified? Why does it matter?
1) Their revocability;
2) The degree to which distributions are subject to the trustee's exercise of judgment (mandatory or discretionary);
3) The degree to which distributions are tied to a standard (ex: health, education, maintenance or support);
4) The alienability of beneficial interests (spendthrift trusts); AND
5) Whether the trust is self-settled (i.e., the settlor is a beneficiary).
Rights of creditors and beneficiaries vary with the type of trust involved.
32
Revocable Trusts: What are the rights of contingent beneficiaries?
As long as the trust is REVOCABLE, the duties of the trustee are owed solely to the settlor.
TX Law - A contingent beneficiary lacks standing to complain of a transaction by a settlor/co-trustee of a revocable trust who was for his life the sole beneficiary with vested rights in the trust.
33
Revocable Trusts: Can a settlor adjust a trustee's duties?
Settlor CANNOT ENLARGE the duties of a trustee WITHOUT THE TRUSTEE'S EXPRESS CONSENT.
34
Revocable Trusts: What are the rights of creditors?
UTC and Restatement allow creditors of a settlor of a revocable trust to reach trust assets.
Texas Statutory Law - does not expressly address this issue.
TTC does deny spend-thrift protection to a settlor's interest in a trust of which the settlor is a beneficiary.
35
Mandatory and Discretionary Trusts: What's the difference between mandatory and discretionary?
MANDATORY INCOME TRUST - requires that the trustee pay ALL trust income to designated beneficiaries.
DISCRETIONARY TRUST - Distributions of income and/or principal are made in the DISCRETION of the trustee, which may or may not be tied to a standard.
Exercise of discretion by the trustee is NOT ABSOLUTE. Settlor may NOT eliminate the duty of the trustee to act in good faith and in accordance with the purposes of the trust.
CASE LAW - supports the view that a court rarely interferes with a trustee's exercise of discretion.
STANDARD - CLEAR ABUSE OF DISCRETION
36
Discretionary Trusts: What rights do creditors have as to beneficiaries?
TRADITIONAL RULE - creditors of a non-settlor beneficiary of a discretionary trust CANNOT reach any interest of the beneficiary in the trust.
TEXAS - generally consistent with the common law rule.
MODERN RESTATEMENT - creditor can require the trustee to make a distribution to the same extent that the beneficiary could do so (subject to an abuse of discretion).
SPECIAL RULE FOR CLAIMS FOR CHILD SUPPORT - TFC provides that a court may order the trustees of a discretionary trust to make disbursements for the support of a child to the extent the trustees are required to make payments to a beneficiary who is required to make child support payments. LIMITED TO THE INCOME FROM THE TRUST PROPERTY AND NOT THE TRUST PRINCIPAL.
SPECIAL RULE FOR CLAIMS AGAINST SETTLOR/BENEFICIARY - Creditors of the settlor of a trust of which the settlor is ALSO A BENEFICIARY can reach the settlor's interest in the trust to the MAXIMUM EXTENT that, in the exercise of the trustee's discretion, the settlor would be entitled to trust assets.
37
What are spendthrift trusts? Are they enforceable?
A trust with a clause stating that the interest of a beneficiary in the income and/or principal of the trust may NOT be voluntarily or involuntarily transferred BEFORE PAYMENT OR DELIVERY of the interest to the beneficiary by the trustee.
These are GENERALLY ENFORCEABLE IN TEXAS.
38
How is a spendthrift trust created?
With a spendthrift PROVISION.
A statement in the trust instrument that it is a "spendthrift trust" suffices to create spendthrift protection.
39
Spendthrift Trusts: What is the nature of protection provided by a spendthrift provision? Are there exceptions?
Creditors can STILL reach assets DISTRIBUTED to the beneficiary.
The effect of the clause is that it EXEMPTS from creditors' claims the assets of the trust IN THE HANDS OF THE TRUSTEE, as well as the equitable interest of the beneficiary in the trust.
EXCEPTIONS -
1) DOES NOT protect the beneficial interest of the SETTLOR IN A SELF-SETTLED TRUST.
RECENT CHANGES TO TEXAS STATUTE:
Settlor is NOT considered a beneficiary just because her interest in the trust was created by the exercise of a power of appointment by a third party.
Settlor is NOT deemed to have contributed property to an irrevocable trust that is an intervivos trust for the settlor's spouse, IF settlor is a beneficiary of the trust AFTER the death of the settlor's spouse.
Settlor is NOT deemed to have contributed property to an irrevocable trust for the benefit of a person to the extent that the property of the trust was subject to a GENERAL POWER OF APPOINTMENT in another person
EFFECT OF THESE RECENT CHANGES - SETTLOR'S CREDITORS CANNOT REACH HER INTEREST IN THE SPENDTHRIFT TRUST IF SHE IS NOT TREATED AS THE SETTLOR OR A BENEFICIARY;
2) DOES NOT defeat the interest of the federal government in enforcing a FEDERAL OR STATE TAX LIEN;
3) A creditor with a claim arising from the furnishing of NECESSARIES (food or medical care) to a beneficiary is NOT DEFEATED by a spendthrift clause; AND
4) TFC provides that a court may order the trustees of a spendthrift trust to make disbursements for the support of a child to the extent the trustees are required to make payments to a beneficiary who is required to make CHILD SUPPORT payments.
40
Spendthrift Trusts: What is the status of beneficiaries as "settlors" on account of powers of appointment?
A beneficiary is NOT considered to be a settlor, and is NOT considered to have the power to transfer beneficial interests in trust or to have made such a transfer, merely because the beneficiary holds or exercises one or more of the following:
1) Power to consume or invade trust principal, if that power is: (a) exercisable only with the consent of someone with an adverse interest; OR (b) limited to an ascertainable standard (health, education, maintenance, or support);
2) A limited power of appointment (e.g., the power to appoint trust property to someone other than the beneficiary, her estate, and the creditors of either);
3) A testamentary power of appointment;
4) A so-called "5 & 5" power described in the IRC;
5) A right to withdraw trust principal not exceeding the amount of the annual exclusion for federal gift taxes.
IN ADDITION, a beneficiary is NOT considered to be a settlor merely because of the LAPSE, WAIVER, or RELEASE of one of the powers described above.
WHAT IS THE EFFECT OF THESE RULES? These rules SHIELD trust assets from the claims of creditors of beneficiaries who hold any of these powers.
41
What are support trusts?
Trust that requires a trustee to make payments of income and/or principal to the beneficiary in an amount necessary for her support in accordance with an ASCERTAINABLE STANDARD (HEMS - health, education, maintenance, and support).
To provide for the beneficiary's support is to provide funds to enable the beneficiary to live in his or her ACCUSTOMED MANNER OF LIVING.
DISTRIBUTIONS - can be phrased under the trust instrument as MANDATORY OR DISCRETIONARY.
42
Support Trusts: What are the rights of a beneficiary to distributions?
A beneficiary CAN COMPEL a distribution upon a SHOWING OF NEED AND establishing the TRUSTEE'S ABUSE OF DISCRETION.
43
Support Trusts: What are the rights of a beneficiary's creditors?
Beneficiary of a support trust is treated similarly to the beneficiary of a spendthrift trust.
Beneficiary CANNOT ALIENATE her interest, and creditors generally cannot reach the beneficiary's interest.
EXCEPTION: Claims by suppliers of NECESSARIES and CLAIMS FOR CHILD SUPPORT may be satisfied from support trusts.
44
T/F - If support distributions are explicitly to be made in the exercise of the trustee's discretion, the rights of creditors in a discretionary trust generally apply.
True.
45
What are the general default powers of trustees?
TTC sets forth a list of extensive powers that trustees possess, UNLESS THE TRUST INSTRUMENT STATES OTHERWISE.
SETTLOR CAN ADD TO, RESTRICT, OR ELIMINATE the powers in the trust instrument.
DEFAULT POWERS ARE NON-EXCLUSIVE - A trustee may exercise any powers in addition to those explicitly set forth in the TTC that are necessary or appropriate to carry out trust purposes.
CAVEAT - Just because a trustee has the power to take one of the actions authorized under the TTC, DOES NOT mean that doing so is necessarily consistent with the trustee's fiduciary duties.
46
What are examples of default trustee powers?
Without limitation, the trustee may:
1) Invest in, continue, or participate in the operation of any business or other investment enterprise in any form;
2) Exchange, subdivide, develop, improve, or partition real property;
3) Adjust boundaries on real property;
4) Dedicate real property to public use or dedicate easements to public use without consideration;
5) Remodel and repair buildings;
6) Contract to sell, sell and convey, or grant an option to sell real or personal property, for cash or credit, with or without security;
7) Make distributions to a minor or a person who is incapacitated in any of the following ways: (a) beneficiary, (b) guardian, (c) HEMS directly, (d) custodian, (e) reimbursing caretaker, (f) managing a separate fund, and (g) property in divided or undivided interests.
47
What actions can co-trustees take?
May act by MAJORITY DECISION; unanimity is NOT required.
A trustee MAY DELEGATE to a co-trustee the performance of a trustee's function UNLESS the trust instrument requires joint performance. DELEGATION IS REVOCABLE, UNLESS EXPRESSLY MADE IRREVOCABLE.
Delegation does NOT remove the trustee from responsibility UNLESS the trustee has communicated the delegation to all other co-trustees and has filed the delegation in the records of the trust.
A co-trustee need not participate in the performance of a trustee function if she is unable to do so because of ILLNESS, DISQUALIFICATION, ABSENCE, OR TEMPORARY INCAPACITY.
48
What are the rights of a trustee?
Entitled to REASONABLE COMPENSATION for her services, UNLESS the terms of trust provide otherwise OR a court denies her compensation on account of breach of trust.
Entitled to EXONERATION (if she has not yet paid the claim) or REIMBURSEMENT (if she has paid the claim) for certain TORTS committed in the administration of the trust under TTC.
May discharge or reimburse herself from trust property for expenses of trust administration.
49
What are the liabilities of a trustee?
Trustees are accountable to beneficiaries for PROFITS arising from trust administration.
A term of a trust relieving a trustee of liability for any profit derived by the trustee from a breach of trust is UNENFORCEABLE.
50
What damages is a trustee liable for?
A trustee who commits a breach of trust is generally chargeable with RESULTING DAMAGES.
In TEXAS, a term of a trust is UNENFORCEABLE to the extent that it relieves a trustee of liability for a breach of trust committed: (a) in bad faith; (b) intentionally; OR (c) with reckless indifference to the interest of a beneficiary.
A term in a trust instrument relieving the trustee of liability for a breach of trust is NOT effective to the extent that the term is inserted in the trust as a result of an abuse by the trustee of a fiduciary duty to or confidential relationship with the settlor.
51
Can co-trustees be liable?
A trustee who DOES NOT JOIN IN AN ACTION of a co-trustee is not liable for the co-trustee's action, UNLESS the trustee does not exercise reasonable care to:
1) Prevent a co-trustee from committing a serious breach of trust; AND
2) Compel a co-trustee to redress a serious breach of trust.
DISSENTING TRUSTEE who joins in an action at the direction of the majority of the trustees and who has NOTIFIED ANY CO-TRUSTEE of the dissent IN WRITING AT OR BEFORE THE TIME OF THE ACTION, IS NOT LIABLE for the action.
52
What is the liability of successor trustees?
A successor trustee is liable for a breach of trust of a predecessor trustee ONLY IF SHE KNOWS OR SHOULD KNOW OF THE FACTS constituting a breach of trust AND SHE:
1) Improperly permits the situation to continue;
2) Fails to try reasonably to compel to predecessor to delivery trust property to her; OR
3) Fails to try reasonably to compel a redress of the breach of trust.
53
Can a trustee be liable to third parties? Can a trustee seek reimbursement or exoneration?
Third persons can sue a trustee for the commission of torts occurring in the course of trust administration.
Trustee may be entitled to exoneration or reimbursement from the trust in the following circumstances:
1) Trustee was properly engaged in a business activity for the trust and the tort is a COMMON INCIDENT of that kind of activity;
2) Trustee was properly engaged in a business activity for the trust and neither the trustee nor an officer or employee of the trustee is guilty of actionable negligence or intentional misconduct in incurring the liability; OR
3) The TORT INCREASED THE VALUE of the trust property (only available to the extent of the increase in value).
EXAMPLE - If a tort bettered a trust by $1 million but caused $2 million in damages, then no reimbursement from trust assets.
54
What is a trustee's duty of loyalty?
Trustee must invest and manage the trust funds SOLELY IN THE INTEREST OF THE BENEFICIARIES. This FORBIDS the trustee from acting in any manner that is not in the BEST INTEREST OF THE BENEFICIARIES.
55
What is the "No Further Inquiry" Rule?
When a trustee engages in an act of self-dealing with trust property, the trustee has breached the trust, even if the transaction is entirely fair to the beneficiaries.
56
Explain the specific rules prohibiting self-dealing under the TTC.
TTC codifies the No Further Inquiry Rule and modifies it in limited contexts.
LOANS - A trustee is generally forbidden from lending trust funds to:
1) Itself, an affiliate, or the trustee's relative;
2) A director, officer, or employee of the trustee or an affiliate; OR
3) The trustee's employer, employee, partner, or other business associate.
EXCEPTION - A corporate trustee can generally deposit trust funds with itself IF: (a) authorized in the trust instrument, OR (b) the funds are being held pending investment, distribution, or payment of debts.
NOTE - A trustee, on behalf of the trust, can borrow from the trustee in its non-fiduciary capacity.
PURCHASES AND SALES - Trustee must not buy or sell trust property from or to the same persons who cannot receive a loan from the trust.
EXCEPTIONS - Limited exceptions exist in certain contexts:
1) Sales of a corporate trustee's own capital stock held in trust to its directors and officers, WITH COURT APPROVAL;
2) Investments in investment management companies and investment trusts of which the trustee or an affiliate serves as advisor, etc; AND
3) RECENT STATUTORY CHANGE - In the case of bank and trust companies, purchases of insurance from a division or affiliate of the institution.
MULTIPLE TRUSTS - Texas law prohibits the sale of trust property by a trustee of one trust to another trust of which she is also the trustee UNLESS the property is an obligation guaranteed by the U.S. Government and sold for its market value.
57
What are the typical remedies for a trustee's breach of his duty of loyalty?
Remedies in the case of a sale of trust property in a self-dealing transaction include:
1) Returning the property to the trust (unless the trustee has resold the property to a good faith purchaser for value); AND
2) Causing the trustee to account for any profits.
If the trustee has sold property to the trust, the beneficiaries can force the trustee to RESCIND the transaction and repay the purchase price.
58
Are there any exceptions to the prohibition against a trustee self-dealing?
Courts do NOT find a breach of trust on account of self-dealing IF:
1) The transaction is FAIR to the beneficiaries;
2) The trustee acted IN GOOD FAITH; AND
3) Either the settlor AUTHORIZED it or the beneficiaries CONSENTED to it AFTER FULL DISCLOSURE.
59
Can a trustee delegate his or her duties? What are the requirements?
A trustee may delegate INVESTMENT AND MANAGEMENT FUNCTIONS that a PRUDENT TRUSTEE OF COMPARABLE SKILL could properly delegate under the circumstances.
SPECIFIC REQUIREMENTS: Trustee must exercise REASONABLE CARE, SKILL, AND CAUTION IN:
1) Selecting an agent;
2) Establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust; AND
3) Periodically reviewing the agent's actions.
A TRUSTEE THAT COMPLIES WITH THESE REQUIREMENTS IS NOT LIABLE TO THE TRUST OR ITS BENEFICIARIES FOR THE ACTIONS OF THE AGENT, UNLESS:
1) The agent is an AFFILIATE of the trustee, OR
2) Under the terms of the delegation, disputes with the agent must be arbitrated or the parties have shortened the period for bringing an action by the trustee or a beneficiary with respect to an agent's actions.
60
What are the duties of an agent of a trustee?
Duty to the trust to EXERCISE REASONABLE CARE to comply with the terms of the delegation.
61
What is the duty of prudent administration?
A trustee that invests and manages trust assets has a duty to comply with the PRUDENT INVESTOR RULE (default rule).
A trust instrument MAY ALTER the prudent investor rule. In that case, the trustee is NOT liable for reasonable relying on trust terms.
62
What is the basic content of the Prudent Investor Rule?
A trustee must invest and manage trust assets as a prudent investor would, by considering purposes, terms, distribution requirements, and other circumstances of the trust.
Trustee must exercise REASONABLE CARE, SKILL, AND CAUTION.
Generally, a trustee may invest in ANY kind of property or type of investment consistent with the standards of the prudent investor rule.
63
What is the portfolio approach?
A trustee's decisions respecting individual assets must be evaluated in the context of the trust portfolio AS A WHOLE AND AS A PART OF AN OVERALL INVESTMENT STRATEGY having risk and return objectives reasonably suited to the trust.
64
What factors must a trustee consider when investing and managing trust assets?
1) General economic conditions;
2) The possible effect of inflation or deflation;
3) The expected tax consequences of investment decisions or strategies;
4) The role that each investment or course of action plays within the overall trust portfolio;
5) The expected total return from income and the appreciation of capital;
6) Other resources of the beneficiaries;
7) Needs for liquidity and regularity of income, and preservation or appreciation of capital; AND
8) An asset's special relationship or special value to the purposes of the trust or to one or more of the beneficiaries.
65
Are any extra expectations placed on trustees with special expertise?
A trustee who has special skills or expertise MUST USE THOSE SPECIAL SKILLS OR EXPERTISE.
66
What is diversification?
A trustee must generally DIVERSIFY the investments of the trust (avoids placing all your eggs in one basket / lowers risk).
EXCEPTION: Trustee does not need to diversify if she reasonably determines that, because of special circumstances, the purposes of the trust are BETTER SERVED without diversification.
67
What must the trustee do at the inception of receiving the trust assets or accepting the trusteeship?
Within a reasonable time after accepting a trusteeship or receiving trust assets, the trustee must review the trust assets and make decisions concerning the retention and disposition of assets.
This is done to bring the trust portfolio into compliance with the purposes, terms, distribution requirements, and other circumstances of the trust, and with the requirements of the prudent investor rule.
68
What are the common law duties that are also applicable to trustees?
1) DUTY TO COLLECT AND PROTECT TRUST PROPERTY - duty to obtain possession of the trust assets on a timely basis, and then examine them. If the assets are received from an executor, the trustee must hold the executor responsible for any damages attributable to the executor's breach of fiduciary duty.
2) DUTY TO EARMARK TRUST PROPERTY - a trustee must earmark (identify) true assets to ensure proper identification.
3) DUTY NOT TO COMMINGLE TRUST AND OTHER FUNDS - duty not to commingle trust property with his and others' funds. EXCEPTION - TTC permits corporate fiduciaries to establish COMMON TRUST FUNDS to provide investments to itself as trustee.
69
What is a trustee's duty to account?
UNLIKE SOME STATES, TEXAS DOES NOT REQUIRE AN ANNUAL ACCOUNTING BY TRUSTEES.
UPON DEMAND: By written demand, a beneficiary may request the trustee to deliver to each beneficiary of the trust a written statement of accounts covering all transactions since the last accounting or since the creation of the trust, WHICHEVER IS LATER.
REFUSAL: If the trustee FAILS OR REFUSES to deliver the statement ON OR BEFORE THE 90TH DAY after the date the trustee RECEIVES the demand, ANY BENEFICIARY of the trust may file suit to COMPEL the trustee to deliver the statement.
NEED NOT ACCOUNT TO BENEFICIARIES MORE FREQUENTLY THAN ONCE EVERY 12 MONTHS.
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What must an accounting contain?
A written statement of accounts must show the following:
1) All trust property that has come to the trustee's knowledge or into the trustee's possession and that has not been previously listed as property of the trust;
2) A complete account of receipts, disbursements, and other transactions regarding the trust property for the period covered by the account;
3) A listing of all property being administered, with an adequate description of each asset;
4) The cash balance on hand and the name and location of the depository where the balance is kept; AND
5) All KNOWN LIABILITIES owed by the trust.
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What is a trustee's duty to inform?
There is a common law duty to keep the beneficiary informed about the trust (TTC section addressing "reasonably informed" has been repealed).
IRREVOCABLE TRUSTS - Trustee should probably inform beneficiaries of a proposal to sell a major asset of the trust.
A trustee generally must give the beneficiary UPON HIS REQUEST:
1) Complete and accurate information regarding the nature and amount of trust property; AND
2) Permit him to inspect the trust property and records.
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What is the duty of impartiality?
TTC states that if a trust has TWO OR MORE BENEFICIARIES, the trustee must act IMPARTIALLY in investing and managing the trust assets, taking into account any differing interests of the beneficiaries.
The law requires a trustee NOT to favor a life income beneficiary over a remainder beneficiary, and vice versa.
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Duty of Impartiality: What are the two types of interests in a trust on the beneficiary side? How are they both to be handled by the trustee traditionally and today?
Statutory law specifies what forms of returns on assets are classified:
1) As "income" subject to being distributed to "income beneficiaries;" AND
2) As "principal" ultimately distributed to "remainder beneficiaries."
TRADITIONAL APPROACH TO IMPARTIALITY - Requires a trustee to invest trust assets so as to produce an appropriate amount of income to benefit the income beneficiaries, while preserving, and even enhancing the value of, principal to benefit the remainder beneficiaries.
THEORY OF TOTAL RETURN - Suggests that a trustee should invest so as to maximize total return, even if that means that the form of return would primarily consist of "principal" or "income" under traditional state law, as long as the income beneficiary and the remainder beneficiaries receive an appropriate share of the TOTAL return.
MODERN APPROACH - Enables a trustee to maximize value to all beneficiaries by investing on a total return basis and allocating receipts between income and principal, as necessary to fulfill the duty of impartiality (basically follows the Total Return Theory).
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Duty of Impartiality: What is the Texas approach?
TEXAS UNIFORM PRINCIPAL AND INCOME ACT - The Texas UPIA generally ADOPTS THE MODERN APPROACH to the duty of impartiality.
TRUST TERMS CONTROL SPECIFIC ALLOCATIONS - If the terms of the trust state how a particular receipt is to be allocated to income and/or principal, those terms control.
TRUSTEE DISCRETION - If the terms of the trust state that the trustee has discretion to allocate a receipt or disbursement to income or principal, the trust terms are respected EVEN IF default rules of the TTC would produce a different result.
EXCEPTION - Trustee cannot use discretion to favor one or more beneficiaries over another.
EXCEPTION TO THE EXCEPTION - A trustee may favor one or more beneficiaries if the trust terms clearly authorize or compel such favoritism.
NOTE: If the terms of the trust do not give a trustee discretion to determine what is income and what is principal, the default rules of the TTC generally control.
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Duty of Impartiality: What if the trustee feels like the default rules under the TTC allocating income and principal disbursements produces an unfair result?
This is called "THE ADJUSTMENT POWER." The UPIA provisions authorize the trustee to adjust between principal and income to the extent necessary under the following circumstances:
1) The trustee manages trust assets as a prudent investor;
2) Some trust distributions are expressly tied to income; AND
3) The trustee cannot follow the default rules without violating its duty of impartiality.
ALL RELEVANT FACTORS should be considered by the trustee in deciding how to exercise the power of adjustment. The power is subject to judicial review, but can be judicially modified ONLY IF the trustee has ABUSED ITS DISCRETION.
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Duty of Impartiality: How do the default rules under the TTC allocate between income and principal?
TO INCOME:
1) Cash distributions;
2) Rents from leased property;
3) Lease cancellation or renewal fees;
4) Interest on debt holdings;
5) 10% of Royalties from most forms of intangible property;
6) Equitable allocations of oil and gas royalties, shut-in well payments, and bonuses;
7) Delay rentals on an oil and gas lease; AND
8) The portion of production payments reflecting interest.
TO PRINCIPAL:
1) Property distributions;
2) Stock dividends;
3) Liquidating distributions from a business entity;
4) Distributions in exchange for stock;
5) Capital gain distributions from mutual funds;
6) Amounts received from the sale or exchange of trust assets;
7) Condemnation proceeds;
8) Life insurance proceeds under a contract naming the trustee as beneficiary;
9) 90% of royalties from most forms of intangible property;
10) "Equitable" allocations of oil and gas royalties, shut-in well payments, and bonuses; AND
11) The portion of production payments NOT reflecting interest.
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Duty of Impartiality: How do the default rules under the TTC allocate EXPENSES between income and principal?
Trust income is charged with the following expenses:
i) One-half of the regular compensation to the trustee and to those who provide investment, advisory, or custodial services to the trustee;
ii) One-half of accounting costs, court costs, and the costs of other matters affecting trust interests;
iii) Ordinary expenses in their entirety; and
iv) Insurance premiums that cover the loss of a trust asset.
2. Expenses Charged to Principal
Trust principal is charged with the following expenses:
i) The remaining one-half of the regular compensation to the trustee and to those who provide investment, advisory, or custodial services to the trustee;
ii) The remaining one-half of accounting costs, court costs, and the cost of other matters affecting trust interests;
iii) All payments on the principal of any trust debt;
iv) All expenses of any proceeding that concerns an interest in principal;
v) Estate taxes; and
vi) All payments related to environmental matters.
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T/F - The ability to amend or terminate a trust depends on the type of trust.
True.
In some cases, it depends on whether the settlor is alive and all beneficiaries consent.
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How does one modify and terminate a revocable trust?
A SETTLOR with the power to revoke (terminate) a trust also has the power to modify (amend) it. MAY NOT ENLARGE THE DUTIES OF THE TRUSTEE WITHOUT ITS EXPRESS CONSENT.
A WRITTEN revocable trust requires that amendments and revocations BE IN WRITING. Revocation can be expressed in ANY MANNER, including a revocation BY WILL.
The TTC DOES NOT REQUIRE the CONSENT of the beneficiary in order for the settlor to amend the trust.
The DEFAULT RULE for revocability in Texas - UNLESS the trust instrument expressly states otherwise, the trust is REVOCABLE (this is the presumption in Texas).
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How does one modify and terminate an irrevocable trust?
A trust may be terminated or modified by the CONSENT of the SETTLOR AND ALL OF THE BENEFICIARIES.
Applies EVEN IN THE CASE OF A SPEND-THRIFT TRUST.
Consent of the beneficiaries alone is NOT sufficient to modify a trust, unless the trust instrument provides otherwise.
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How does one modify and terminate a trust by court order?
TEXAS LAW - trust may be modified or terminated only in limited circumstances, and then only by a COURT ORDER. Generally, only a trustee or beneficiary may PETITION a court for an order to modify or terminate a trust in these limited circumstances:
1) Trust purposes have been fulfilled or have become illegal or impossible to fulfill;
2) Because of circumstances unforeseen by the settlor, the order will further the purposes of the trust;
3) Modification of administrative, non-dispositive provisions is appropriate to prevent waste or avoid impairment of the trust's administration;
4) Order is appropriate to achieve the settlor's tax objectives and not contrary to his intent; OR
5) IF ALL BENEFICIARIES CONSENT OR ARE DEEMED TO HAVE CONSENTED, AND: (a) continuance of the trust is unnecessary to achieve any material trust purpose, OR (b) The order is not inconsistent with any material trust purpose.
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When is a beneficiary deemed to have consented to a court order modifying or terminating a trust?
Beneficiaries who are minors, incapacitated, or unborn and consent is obtained from the person's guardian ad litem or guardian of the estate, or his parent who has no conflict of interest.
Deemed Consent exists if another person having a substantially identical interest to that of the beneficiary ADEQUATELY REPRESENTS HIS INTEREST.
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Can settlors petition for a court order modifying or terminating a trust?
Settlor GENERALLY LACKS STANDING.
However, case law supports the position that an action for REFORMATION of an inter vivos trust to correct a MISTAKE may be brought by the settlor.
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How must the court act in modifying or terminating a trust?
Court must exercise DISCRETION to modify or terminate a trust in a manner that conforms as nearly as possible to the PROBABLE INTENT OF THE SETTLOR.
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T/F - A trust my be modified or terminated by court order even though it is a spendthrift trust.
True
HOWEVER, the fact that it is a spendthrift trust is a FACTOR THE COURT MUST CONSIDER.
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What is the difference between modifying a trust and trust decanting?
Trust decanting was codified in 2013.
Decanting allows a trustee of an irrevocable, discretionary trust to "decant" or pour assets from one trust to a new trust in certain circumstances.
RATIONALE: Arrange for trust assets to be governed by more desirable terms than those of the original trust.
EFFECT: Essentially the same as modifying terms of an existing trust, BUT NOT SUBJECT TO LIMITATIONS ON MODIFYING TRUST TERMS.
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Can a trustee be changed?
A trustee may RESIGN in accordance with the terms of the trust instrument. In the absence of a provision, a trustee may PETITION the court for permission to resign as trustee.
A trustee may also be REMOVED in accordance with the terms of the trust instrument. On the petition of an INTERESTED PERSON and AFTER A HEARING, a court may remove a trustee and deny part or all of the trustee's compensation IF:
1) The trustee materially violated or attempted to violate the terms of the trust AND the violation or attempted violation results in a material financial loss to the trust;
2) The trustee becomes incapacitated or insolvent;
3) The trustee fails to make a required accounting; OR
4) The court finds OTHER CAUSE for removal.
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How is a successor trustee selected?
On the death, resignation, incapacity, or removal of a sole or surviving trustee, a SUCCESSOR TRUSTEE must be selected according to the method, if any, prescribed in the trust instrument. If a successor is not selected under the terms of the trust instrument, a court MAY, and on petition of any interested person MUST, appoint a successor.
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Explain trust decanting in the instance where a trustee has full discretion to do so.
An authorized trustee who has full discretion to distribute the principal of a trust may distribute ALL OR PART of it in favor of a trustee of a second trust for the benefit of:
1) Current beneficiaries of the first trust; AND
2) Remainder beneficiaries of the first trust.
MUST INVOLVE A DISCRETIONARY TRUST. If the trustee lacks discretion over distributions of principal, decanting is NOT AVAILABLE, unless specifically authorized by the terms of the trust.
FULL DISCRETION - no limit in any way on distribution power.
DIVIDED DISCRETION - authorized trustee has full discretion but another trustee has limited discretion (authorized trustee may exercise power to distribute the trust principal).
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Trust Decanting: What is an authorized trustee?
Someone OTHER THAN THE SETTLOR who has authority under the terms of the first trust to distribute its principal for the benefit of one or more current beneficiaries.
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Trust Decanting: What standard is the trustee held to?
Trustee must exercise the power:
1) In GOOD FAITH;
2) In accordance with the terms and purposes of the trust; AND
3) In the INTERESTS OF THE BENEFICIARIES.
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T/F - Beneficiaries of the second trust in trust decanting may include those who become members of the class in the first trust after the distribution to the second trust.
True.
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T/F - The rules of trust decanting are non-exclusive and do not limit the power of a trustee to distribute property in further trust under the terms of a trust instrument, under other law, or under a court order.
True
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Trust Decanting: What is required to distribute trust property to a new trustee of a new trust?
MUST BE MADE BY:
1) A WRITTEN INSTRUMENT:
2) That is SIGNED AND ACKNOWLEDGED BY THE AUTHORIZED TRUSTEE; AND
3) FILED with the records of the first trust and second trust.
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T/F - The settlor of the first trust is the settlor of the second trust in the case of trust decanting.
True
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Is there a duty to decant?
NO
The rules do NOT create or imply a duty on behalf of the trustee to decant. Impropriety may not be inferred as a result of the trustee's decision not to exercise power to decant.
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T/F - In trust decanting, a trustee may grant a power of appointment in the second trust to one or more of the current beneficiaries of the first trust who, at the time the power is granted, is eligible to receive the principal outright.
True.
The class of permissible appointees may be broader than or different from the current and remainder beneficiaries of the first trust.
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Trust Decanting: What if the trustee has limited discretion?
BASIC RULE - An authorized trustee who has limited discretion to distribute the principal (ex: HEMS) may distribute ALL OR PART of the principal of the trust in favor of a trustee of a second trust subject to the following:
1) Current beneficiaries of the second trust must be the SAME as the current beneficiaries of the first trust;
2) Remainder beneficiaries of each trust must be the SAME;
3) Second trust must include the SAME LANGUAGE authorizing the trustee to distribute the principal or income of the trust as included in the first trust;
4) If the beneficiaries of the first trust are described as a CLASS, the beneficiaries of the second trust must include ALL PERSONS who become members of that class AFTER the distribution to the second trust; AND
5) If the first trust grants a power of appointment to a beneficiary, the second trust must grant the same power and the class of permissible appointees must be the same as under the first trust.
GENERAL RULES OF DECANTING APPLY TO DECANTING TRUSTEES WITH LIMITED DISCRETION (subject to the special requirements listed above).
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Trust Decanting: What notice is due?
Authorized trustee may exercise power of distribution WITHOUT:
1) The consent of the settlor;
2) The consent of the beneficiaries; AND
3) Court approval, IF
4) The trustee provides ALL of the current and remainder beneficiaries WRITTEN NOTICE
NOTICE MUST INFORM THE BENEFICIARIES THAT:
1) Trustee intends to exercise power; AND
2) Beneficiaries may petition the court to approve, modify, or deny the exercise of the power.
MUST INCLUDE copies of the first trust and proposed second trust.
MUST BE GIVEN not later than 30 DAYS BEFORE the proposed distribution.
MUST GIVE WRITTEN NOTICE TO THE ATTORNEY GENERAL IF:
1) A charity is entitled to notice,
2) The trustee has authority to distribute trust assets to one or more charities that are NOT named; OR
3) Trustee has authority to make a distribution for a CHARITABLE PURPOSE.
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Trust Decanting: Does a trustee ever not have to give beneficiaries notice?
Trustee is NOT required to provide notice to a beneficiary when decanting if the beneficiary:
1) Is not able to be located after the trustee exercises reasonable diligence;
2) Is unknown;
3) Waived notice; OR
4) Is a descendant of a beneficiary to whom the trustee has given notice if they have SIMILAR INTERESTS in the trust and no conflict of interest.
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Trust Decanting: Can a trustee seek court action to aid in trust decanting? What is the burden of proof?
An authorized trustee MAY petition the court to order a distribution.
If the trustee receives a WRITTEN OBJECTION FROM A BENEFICIARY, the trustee or the beneficiary may petition the court to approve, modify, or deny distribution.
If the trustee receives a WRITTEN OBJECTION FROM THE TEXAS ATTORNEY GENERAL, trustee may NOT make a distribution without petitioning the court.
BURDEN OF PROOF - Trustee must prove that the proposed distribution:
1) Furthers the purposes of the trust;
2) Is in accordance with the terms of the trust; AND
3) Is in the interests of the beneficiaries.
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Trust Decanting: What limits are placed on trust decanting?
CANNOT decant if EXPRESSLY prohibited by the trust instrument.
HOWEVER, a general prohibition on the amendment or revocation of a trust, or a spendthrift clause, DOES NOT preclude the exercise of a power to decant.
CANNOT DECANT TO:
1) Modify a beneficiary's current vested right to receive a MANDATORY distribution of income or principal or a mandatory annuity or unitrust interest, to withdraw a percentage of the value of a trust, or to withdraw a specified dollar amount from the trust;
2) Materially impair the rights of any beneficiary;
3) Materially limit a trustee's fiduciary duty;
4) Decrease or indemnify against a trustee's liability;
5) Exonerate a trustee from liability for failure to exercise reasonable care;
6) Eliminate a provision granting another person the right to remove or replace the trustee;
7) Modify a RAP provision in first trust, unless expressly permitted by the first trust; OR
8) Alter intended federal tax benefits of the trust.
SPECIAL RULE - CANNOT DECANT IF IT WOULD DEFEAT S ELECTION OF S CORPORATION UNDER IRC.
FINALLY, CANNOT DECANT SOLELY to change trust provisions regarding compensation of trustee unless directed by the court.
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Explain income vs. principal with regard to royalties.
Oil & Gas Royalties
Prior Texas Law
Income = 72.5%
Principal = 27.5%
Uniform Law
Income = 10%
Principal = 90%
Current Texas -- § 116.174
Equitably
If trust owned royalty interest on 1/1/2004, may use prior Texas law.
Following IRS depletion allowances deemed equitable.
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Explain income vs. principal with regard to timber.
Income = timber removed that does not exceed regrowth
Principal = timber removed that exceeds regrowth
